Ben Bernanke shows his mettle, again
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Jared Bernstein Guest blogger
I thought Federal Reserve chair Ben Bernanke once again showed some mettle in these to the Senate Budget Committee on the economic outlook. 聽聽He鈥檚 not at all swept up in optimism about recent improvements鈥攈e鈥檚 particularly on point regarding continued weaknesses in the job market鈥攁nd he clearly cites all the reasons to keep pressing on monetary stimulus.
One note on taxes, because this came up on Larry Kudlow鈥檚 show Tuesday night.聽 Ben correctly warned, based on the same type of analysis I show , that the fiscal drag from the tax increases under current law鈥攆ull Bush sunset, AMT hits a lot more people鈥攚ould be too much for a still weak economy to absorb in 2013.
As the WaPo put it:
鈥he Fed chief continued to stress that a sharp, immediate push to reduce the deficit could harm the recovery in the upcoming months. In January 2013, he pointed out, the George W. Bush tax cuts will expire, and the major spending cuts triggered by the Budget Control Act will take effect, absent any further action by Congress. As a result, 鈥渢here will be sharp change in fiscal stance of the federal government. Without compensating action, it would indeed slow the recovery,鈥� Bernanke told the committee members.
I think Bernanke knows he鈥檚 operating from a playbook where the Fed is the only game in town in terms of stimulus.聽 The economy still needs a boost鈥攈e called the pace of recovery 鈥渇rustratingly slow鈥濃�攂ut he knows Congress will be MIA for the indefinite future, and that means little new fiscal stimulus will be forthcoming.
That doesn鈥檛 mean, as my buddy Larry K suggested, that Ben is some kind of supply-sider who believes any tax increase will tank the economy. 聽 He鈥檚 got perfectly legit street cred on the need for balanced deficit reduction, and he understands that new revenues will have to be part of that deal.
The issue here is, of course, timing, and the 2.5% of GDP fiscal drag in 2013 (Zandi鈥檚 number) embedded in current law is way too much for what will still be a recovering economy. 聽 The highend cuts should definitely expire on schedule, but the rest should be phased out as things improve.
So, as I鈥檝e said before, nobody鈥檚 perfect, but Bernanke is doing great work. 聽I like the aggressiveness, the creativity (the use of their balance sheet while their main tool鈥搕he benchmark interest rate鈥搃s bound by zero), the transparency and signalling, the clear-eyed assessment of the still-weak economy鈥 even like the neatly-trimmed beard.
All鈥檚 I鈥檓 saying Ben, is that if Perry comes after you, I鈥檝e got your back.
